The Double Hit of Iran Sanctions and the Turkish Financial Crisis Will Change Relationships Across the Middle East

In quick succession, the interconnected economies of the Middle East have been hit by two financial challenges. First, in early August, the Trump administration imposed a new set of US sanctions against Iran. Then, days later, the Turkish lira began to decline sharply, pushed by the imposition of US trade tariffs against Turkish goods. Taken together, this double whammy will impact Middle East societies, economies and foreign policy, and even countries beyond the region.

Both governments in the Middle East have used the language of war to describe what is happening. One Turkish analyst even said the dollar was being “weaponized” against the lira. In Iran, there is an open feeling that the US is waging economic warfare.

The primary impact of sanctions will be felt, naturally, in Iran itself. Already there has been social unrest in the country over rising prices, creating pressure on Iran’s leadership – which is, of course, precisely the reason they have been re-imposed.

But the financial challenges will also be felt across the region, impacting foreign policy and alliances.

Iraq, torn between its neighbor next door and the country that first invaded it and then supported its rebuilding process, is in a particularly difficult situation. Haider Al Abadi, still Iraq’s prime minister while a new government is being assembled, said he disagreed with the sanctions, but felt compelled to partly follow them. “Can I, the prime minister of Iraq, endanger the interests of Iraqis just to take a stand?” he asked a news conference rhetorically.

Rival political parties see an opportunity to attack him, not only because some are close to Tehran, but because ordinary Iraqis remember the devastating impact of US sanctions on their country in the 1990s. A delicate balancing act will be required, but the reintroduction of US sanctions have undoubtedly weakened his position.

But if Iraq has been weakened, some of the Gulf states will be strengthened.

Companies that buy crude oil from Iran must stop by November. If Iran, Opec’s third-largest producer, has to cut oil production, it is expected that Saudi Arabia and the UAE will step in to fill the gap, gifting their treasuries millions more in income. Saudi Arabia, in particular, with significant investment requirements as it rebalances its economy, needs the revenue.

A change in the oil markets will also have political implications further afield. Already, the overwhelming majority of Iran’s oil exports go to Asian countries (China, India and South Korea). In fact, they import more of Iran’s oil than all the major European countries put together. That shifts the political balance and gives the EU countries less leverage over Iran. A punishing sanctions regime also means less future political influence.

It is less clear if it also means immediate political change. The major change that Washington’s Arab allies hope for is the end of Iranian meddling in the Middle East. If anything, sanctions will entrench Iran’s efforts in some countries, while loosening them in others.

Iran may be willing to reduce its support for the Houthi rebels in Yemen, but its relations with Iraq and Lebanon are, for Tehran, non-negotiable. But it is in Syria that the most interesting fallout from the return of sanctions will be felt.

As its economy weakens, Iran will see Syria as more, not less, essential to its geopolitical goals. The “land-bridge” Tehran seeks across Iraq, Syria and Lebanon to the Mediterranean becomes a matter of survival in the absence of a strong economy. The impact of sanctions may reduce how much money Tehran can spend, but it won’t change its political assessment that influence in Syria is essential.

The same is true of Turkey’s lira crisis, which is still playing out. The intervention of Qatar, which pledged $15 billion, and support from European leaders, has rallied the currency, staving off the need for an International Monetary Fund loan. That matters, because seeking financial support from the global body would anger Erdogan’s nationalist base. Yet without it or further external support, the weakening lira will mean they will feel rising prices.

On Syria, Turkey’s assessment is similar to Iran’s. Influence along the border to halt the progression of Kurdish groups is a matter of national security, and regardless of the economic challenges, Turkey will not give that up.

The twin crises will therefore entrench Turkey and Iran in Syria, not weaken their presence.

And that, of course, is without considering what happens further afield. The major consequence of these two crises is that they will continue to push the two major non-Arab Middle Eastern countries out of the so-called “Western orbit,” and toward China and Russia.

Already, the crises have highlighted how interconnected the region is with Asia. India, which has close ties to Iran, is seeking exemptions from the Trump administration, trying to perform a delicate balance similar to Iraq. India was also affected by the Turkish crisis, which caused the rupee to fall 1.5 percent last week, it’s worst one-day fall.

So connected are the economies and politics of the region and its closest allies that what happens in one area affects the others. In financial terms, that is known as contagion, when the weakness of one currency has a knock-on effect elsewhere. The contagion of the Turkish financial crisis and the Iran sanctions will be political as well as economic. A change in the values of the lira and riyal will precipitate changes in political alliances as well.

Faisal Al Yafai is currently writing a book on the Middle East and is a frequent commentator on international TV news networks. He has worked for news outlets such as The Guardian and the BBC, and reported on the Middle East, Eastern Europe, Asia and Africa.